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7/28/2019 Risk Management a Current Challenge in Banking - Presentation
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Risk Management
a current challenge in
BankingPriam Kasturiratna
kastur i@sampath. lk
4th Annual Conference on Information Technology Governance
18th& 19thSeptember 2008, Colom bo Sri Lanka
mailto:kasturi@sampath.lkmailto:kasturi@sampath.lk7/28/2019 Risk Management a Current Challenge in Banking - Presentation
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Risk Management
a current challenge in Banking
Changes taking place
in the Banking and Financial
Services Industry
Challenges to Bankssetting-up
Risk Management frameworks
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Technology
Risk Based Laws &Regulations
Factors Driving Banking and Financial
Service Industry
Standardisation
Financial ServiceInnovations
Competition
Climate Change
& Global Warming
Volatility in Energy& Commodity Markets
Country SpecificConditions
Changing Social &Behavioural Patterns
Emerging Risk Types
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Risk Based Laws and Regulations
Worldwide
Basel II
Anti Money Laundering (AML) and Know Your Customer (KYC) Sarbanes Oxley Act
Sri Lanka
Prevention of Money Laundering Act, No. 5 of 2006
Financial Transactions Reporting Act, No. 6 of 2006
Companies Act, No. 07 of 2007 Directions, circulars and guidelines issued by Central Bank of Sri Lanka,
including Basel II compliance directives.
Laws and Regulations act as a key driver shaping the Banking industry,while generating more complexity in operations as well as in Managing Risk
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Technology
Dr John Lee identifies six major drivers behind Technology Investments in
Banking and Financial Services industry.
Dynamic IT Transformation
Support Organic Growth
Developing new and IT enabled revenues
Defend Revenue sources
Cost Optimisation Industrialised Banking
Technology has been at the foundation of the rapid growth and innovationsin Financial Services since 1980s
Introduction of Technology Changes Processes, Opens up new risk exposures
inherent with the technologies adopted
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Standardisation of Controls and
Business Mechanisms
1. Regulatory cooperation among Governments,
Professional bodies, and International organisations.
2. Cross border Laws and regulations like Basel II, AML
Compliance, Know Your Customer regulations, Laws on
Electronic Commerce, Sarbanes Oxley etc.
3. Banks/Financial Service providers adapting to systems(software/hardware) offered by major global systems
service providers.
Three drivers silently operating to standardise the way Banking is
conducted.
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Financial Service Innovations
Changing customer needs/wants
Changing technologies
Thinning market share and profitability
Why Innovations are coming up in Banking/Financial
Services?
Bankers have emulated many non traditional
concepts into the business, and accept higher risk
levels to generate returns that keep their
stakeholders happy.
Ability to adapt to changing needs of its clientele,
and continuous innovation have become core
competencies of the industry.
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Financial Service Innovations
E-commerce/Mobile technologies Propelled by Changing lifestyles
Most aggressively promoted retail product group
Wealth Management and Retail Investing Services Rising number of high net worth clients
Increasing savings levels of middle/upper middle income
earners
Ageing population investing retirement benefits/savings.
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Financial Service Innovations
Islamic Banking Singaporean and Malaysian initiatives in progress to
establish Islamic Banking
Islamic Financial Services Board of Malaysia has developed
a framework for capital treatment of Islamic products ®ulatory convergence with Basel II
The swift pace of economic development of Middle Easternand other predominantly Muslim countries, combined withstrong commodity exports from many of these nations, hasfuelled demand for the development of a raft of fundinginstruments and investment products that comply withIslamic Sharia law. Monetary Authority of Singaporeestimates that global Islamic Financing market is worthUSD 300 billion, and growing at a rate of 15% every
year Pamela Tang
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Competition among Service Providers
Competition from Non traditional financial serviceproviders Trying to attract clients from traditional banking
institutions
Telecommunications Retailing
Real Estate
Automotive
Plantation sector companies have come out with many alternative
financial service products with appeal.
Not bound by regulations applicable to banks
Usually gives more benefits to clients
Higher margins compared to Banks
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Competition among Service Providers
Competition has affected Profitability of the industry Outsourcing has reduced this burden a little bit, but at the same time
exposing the banks to higher levels of operational risk.
Locally operating Banks are threatened
Market entry by Global Banks
Global players in the market offer branded products across thegeographical boundaries
More demand cross border services from growing financial needs beyondlocal boundaries
With respect to increasing globalisation, what weve seen here in Australia
with the recent arrival of private equity into Australia is the way the market canbe changed by a global rather than a local trend. Australian banks arent very
big in global terms. So what is not a challenge for risk professionals worldwide
is a challenge for risk professionals in Australian banks
Michael Hamar, Group chief risk officer, National Australia Bank
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Volatility in Energy and Commodity
Markets Food & energy crisis
Increased Cost of Living
High impact to middle/lower income groups
Increased Operational expenses for Banks & allother organisations
increasing operational expenses of banks will directly
affect bottom lines
increased credit risk due to contraction of borrowers
repaying power
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Climate Change and Global Warming
Climate change will causeenormous extra costs for
Germany in the future. Incase the global meantemperature rises up to 4.5
degrees Celsius by 2100 -as predicted by the latestIPCC report, in case nomeasures are taken - the
German economy mightface an additional burden ofup to 800 billion Euros by2050.
German Institute for Economic Research (DIW)
The UK Financial ServicesAuthority has cited climate
change as presenting aconsiderable risk to thefinancial services sector inits annual Financial Risk
Outlook report
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Country Specific ConditionsSri Lanka
Higher Market Risk - Volatility of interest and exchange rates Inflation Rates over 20%
Unstable political situation in the north and east
restricts healthy business growth
poses security threats to every type of venture
Could affect Credit, Operational and Market Risk of banks Need for strong Business Continuity Plans has become more critical
Higher Anti Money Laundering & Terrorist Financing Risk (ForeignRemittances, top earner for the country)
Pending issues in the country
GSP plus
Rising cost of living
Issues in transportation, power etc.
Stagnating land & housing markets
Changes in educational system
Restrictions in some of the overseas job markets
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Changing Social and Behavioural Patterns
25 years back and TODAY Response to a criminal or terrorist activity
Bank authorising a transaction on the strength of an email.
PC to PC free calls to a foreign country
Epidemics, hunger and poverty loosing their place as
major threats to human life
Food and water contamination - a silent killer
Stress, Mental and physical health issues are common mans
topics
Home Office balanced
stress-less job
Busy Executive with six figure income
Increased
Cross border activities
White Collar
Crimes
Bribery,
Corruption
Hackers Email, Chat
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Emerging Risk Types
Operational Risk Business ContinuityPlanning
AntiM
oneyL
aundering
Arms and drug trade
Human trafficking
Bribery and corruption
Counterparty failures
Corporate Frauds
Reputation Management
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Technology
Risk Based Laws &Regulations
Factors Driving Banking and Financial
Service Industry
Standardisation
Financial ServiceInnovations
Competition
Climate Change
& Global Warming
Volatility in Energy& Commodity Markets
Country SpecificConditions
Changing Social &Behavioural Patterns
Emerging Risk Types
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Risk Management
Current
Challenges in the Industry
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The Challenges
Increased Responsibilities
& Involvement from Board of Directors
Top Management
Commitment and Support
Setting-up Organisational Structures
HR aspects of Risk Management
Collecting Data &
Managing Data Quality
Business Manager & Risk Manager
Integrating Risk Management
into Business
Training to maintain
Risk Management Capabilities
Risk Management and ICT
Auditing Risk Frameworks
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The Challenges
From the day the board of directors and topmanagement becomes seriously committed to
Risk Management,Board of directors, Top management andeveryone else will look forward to RiskManagers response, and assistance in
performing their functions.
YES, Managing Risk is a key concern for us. BUT WHOWILL BEAR THE ADDITIONAL COST OF IT
It takes two minutes more, to open an account under NewRisk Control Procedure. Customers are not happy, it takeslonger to finish days work !@#$%^&*(!
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Getting Top Management Commitment and
Support Risk Management affects all employees, all processes across the bank
Therefore it is unlikely to be successful without sponsorship from the top
Receiving good level of sponsorship could take a number of months andsometimes years
Starting from commitment to high level of corporategovernance, top management sponsorship shall extend totreating Risk Management as a serious aspect positivelycontributing to the organisationDemonstrating their commitment openly
Working with Risk Manager to implement Risk Managementwithin the bank
Accepting the ultimate responsibility for Risk Managementwithin the bank.
Allocation of sufficient Resources
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Getting Top Management Commitment and
Support
Senior management buy-in is definitely
required. It is a necessity, but not sufficientcondition. In addition there should be buy-in
from individual departments and individualbusiness heads. It is a complex area, because
it looks at human behaviour- it is really a
juxtaposition of human behaviour and riskmanagement
Ravi Varadachari
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Increased Responsibilities and
Involvement from Board of Directors Directive on Corporate Governance (No 11 of 2007)
Appoint a Board Level Sub Committee on Risk Management
Develop Risk Management expertise within the board
Ensure that Risk Management framework is on a sound footing
All officers are updated with current changes in the bankingindustry worldwide.
Companies Act 6 of 2007 Establishes joint & personal liability of directors for ensuing risk is
managed in a sound manner
Directors will be responsible, and increasinglyinvolved in directing top management to makingsure that the organisation & directors themselves
are protected against risks & liabilities.
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Setting-up Organisational Structures
Independent Lines of Defence
Reporting lines and proceduresProper Delegation of Risk Decision Making Authority
Placement of Risk Managers at appropriate hierarchical level
Regulators are increasingly seeking formal internal control assurances from regulated
entities. Organisations should formally assess their risk and controls on an ongoing
basis. At least once a year, management within each of the three lines of defence
should formally attest or provide assurance on the capability maturity of the enterprise
risk management framework as it relates to risks within their scope of authority
Mario Micallef
Business Units
Risk Management
Top Management
Risk Management Committees
Board of Directors
InternalAudit
ExternalAudit
1 32
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Managing HR for Risk Management
Do we have sufficient number of competent RiskManagers to cater to all banks?
Risk Managers may be reluctant to accept the
standardised remuneration packages offered by traditionalbanks
Not many banks are ready to offer premium pay levels toRisk Managers
Risk Managers leaving for better prospects is common.
In much worst scenarios, some banks may find that theheadhunted Risk Manager does not perform to theexpectations
Getting the correct person for the job
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Finding Data Analysis, Documentation and
Communication Skills
Most sought after skills
Problem analysis Good use of econometrics
Technical Writing & Documentation skills
Communication/public relations skills
What Bad analysis could do
create more risk
bad documentation could misinterpret the risk
end up in a trash bin with disrespect.
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Assessing a prospective Risk Manager
Clear cut benchmarks or Industry Certifications ????
What could be of use Financial Risk Management
Information Security
Business Continuity Planning
Project Management
Undergraduate and Masters Level qualifications are some of the useful benchmarks.
What experience is necessary or could help? Banking
Auditing
Information Technology
Project Management
Econometrics
Statistical Data analysis
Legal, Technical Writing
Organisational Re-structuring
When it comes to selections,irrespective whether it is Credit, Market,
Operational Risk, or Anti MoneyLaundering Compliance, banks use acombination of existing qualifications,career history, and a substantial amountof guesswork to assess suitability of anindividual for a Risk Managementposition.
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Retaining Good Risk Managers, Job
Satisfaction and Remuneration
Career/Workplace Challenges faced by RiskManagers
Improper hierarchical placement of the Risk Manager -
Conflicting interests
Risk Manager not having sufficient authority and independency Being overruled by the superiors lacking understanding on risk
principals or conflict of interest
Lack of Senior Management Sponsorship
Risk Manager could be taken as a threat by peers/superiors
Managing internal resistance.
Feeling that they are underpaid in the local market
Lack of training and development opportunities
Career path problems
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Retaining Good Risk Managers, Job
Satisfaction and Remuneration
What determines Remuneration for Sri Lankan RiskManagers
Decision makers understanding on the contribution
from a Risk Manager towards business success
General pay levels of the organisation
Whether there is a strong lobby of Risk Managers in
the market
The bargaining power of the prospective individualIncreased demand for experienced (Risk and Compliance) staff has pushed upsalaries significantly. There has been a year on year increase for complianceprofessionals, particularly at the junior end, which has seen a 25-30% increasein the basic salary. Temporary staff can earn upwards of 300 Sterling Pounds aday.
Victoria Pennington
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Retaining Good Risk Managers, Job
Satisfaction and Remuneration Building long run Risk Expertise
Core banking
Lending
Treasury
Investments
Econometrics
Social sciences
Technical Writing
Information & CommunicationTechnology
Card Business
ecommerce
Legal
Project Management
Auditing
Information Security
Business Process Re-Engineering
A banks board ofdirectors and topmanagementneeds to display
& act with theirstrategic vision,foresight, andlong rangeplanning
capabilities forbuilding a strongRisk ManagementTeam over anumber of years.
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Collecting Data & Managing Data Quality
Risk Management relies heavily on unearthing trends or possibilities through econometrics
large volumes of organised and dependable data
pertaining to events over a number of years are a necessity for reliable results
Historical data becomes a critical success factor once a bank completessetting up its basic Risk Management framework and wants to move up
towards advanced Risk Management approaches with regulator approval.
Banks need to recognise this early, and start data cleansing and collectionwithout delay.
Whether available data is usable for a particular model or system
evaluate what systems or mechanisms that they are going to use for data analysis Data requirements may vary according to the future plans
Data cleansing will also need taking important actions/decisions, modeltesting with available data, expertise to interpret the results and refine datacollection process.
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Collecting Data & Managing Data Quality
As per Global Data Management Survey of Australian, US andUK companies, it was highlighted that,
A high proportion of respondents are not verycomfortable in the quality of their data
Most organisations still view data qualitymanagement as an IT issue, rather than an issue forsenior management, the managing director or corporate board
Confidence in shared (industry) data from third
parties has eroded
Therefore, it is necessary to recognise the
challenges early, plan ahead, and act early.
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Integrating Risk Management Tasks into
Business
Incorporate Risk Management Components in to Policies
Standards
Procedures
Guidelines
Support of board of directors, top management, operations, humanresources, and training
broad knowledge of the existing business processes
knowledge of Risk Management
substantial efforts in planning, documentation, and training
The initial years on this process will be more of managing a projectthan risk management. It would take a few years to complete theprocess, and to obtain organisation wide support for new way of
conducting daily business functions.
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Business Manager vs. Risk Manager
How does a Risk Manager Add Value to businessprocesses ?
Risk Management adds control tasks into the business
process lifecycles.
Processes become longer and time consuming
May need more resources
Customer delays could occur
Training may be needed
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Business Manager vs. Risk Manager
Add Value to Business vs. hampering business Success of the Risk Manager depends in getting buy-in
from the other stakeholders
Depends identifying thin margin between support &
obstruction
Clear communication of expected business benefits
Public relations and communication are not just
preferred skills, they are core competencies of any goodRisk Manager.
Risk Managers true function would be to add businessvalue by ensuring higher predictability of businessoutcomes. Both Risk Managers and Business Managers
need to assist each other in a successful business.
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Training to maintain Risk
Management Capabilities
Periodic Training is crucial for Risk Managers, Board of Directors and top management
Constant update knowledge on worldwide developments in anumber of fields Banking industry
Overall business environment Technical developments/ICT
New risk types
Financial, Economic, technical & Social, etc etc Trends
What could be risk training, continuous knowledgemaintenance ? Theoretical knowledge development
Exposure to the industry practices, counterparties
Knowledge sharing and exposure among local and global
counterparts
k d T
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Risk Management and ICT
ICT is a vital factor that influences everything in banking
The volume and nature of transaction monitoring and analysisneeded cannot be done without ICT
It is impossible to keep up with the worldwide developments inRisk Management without ICT support
From an organisational perspective, every bank must evaluate their ITsystem needs for Risk Management from early days of planning.
Many local banks have chosen not to become the first movers ininvesting on IT systems. Whilst there is some validity in this approach,it could be a mistake not to prepare, as one day every bank will find itimpossible to move on to advanced approaches in Risk Managementwithout IT systems.
A di i i k k
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Auditing Risk Frameworks
Internal and Systems Auditors, as an independent lineof defence could contribute immensely to identify
loopholes not detected by Risk Managers.
Audits, a Regulatory Requirement & a Best Practise.
1. Gaining a formal understanding of the key process & companyobjectives that may affect the operations of the process.
2. Brainstorming risk scenarios before identifying process risks
3. Identifying managements risk tolerance levels for variousprocess risks
4. Assessing the risk infrastructure to evaluate the sustainabilityof the existing risk management activities.
Paul J Sobel
Key Steps in formulation a Risk Audit Programme
A di i Ri k F k
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Auditing Risk Frameworks
Banks face two key challenges in the initialphase
1. Engaging an auditor with
Banking
Systems literacy
Exposure to Risk Management, Anti Money Laundering &
Business Continuity Planning
2. Rearranging existing Internal Audit framework into
Risk Audits
Auditing the banks Risk Framework is not to be taken lightly,
it is urgent, and a must for true progress.
Ri k M
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Risk Management
a current challenge in BankingWhat drives present & future
of
Banking and Financial
Services Industry
Challenges faced by Banks
setting-up
Risk Management frameworks
Technology
Risk Based Laws &
Regulations
Standardisation
Financial ServiceInnovations
Competition
Climate Change
& Global Warming
Volatility in Energy
& Commodity Markets
Country Specific
Conditions
Changing Social &Behavioural Patterns
Emerging Risk Types
Increased Responsibilities
& Involvement from BOD
Top Management
Commitment and Support
Setting-up Structures
HR aspects
Collecting Data &Managing Data Quality
Business & Risk Managers
Integrating Risk Management
into Business
Training
Risk Management and ICT
Auditing Risk Frameworks
C l i h Obj i
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Conclusionsthe Objective
What drives Banking industry & RiskManagement
Underlying challenges in implementing Risk
Management Frameworks The Objective
Understand & appreciate the ground realities in RiskManagement & be prepared for expected challenges
Realise the areas where involvement of the completeorganisation, proactive action and top level vision is needed,
Initiate a healthy discussion as to how Sri Lankan Bankscould manage Risk in a better, structured manner
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Thank you
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